Thursday, 13 December 2012

NBN: Funding with Infrastructure Bonds

Either the Government or Coalition could embrace a funding model for the NBN suggested by Alan Kohler in Business Spectator: Infrastructure Bonds.

Either side of Politics could allow the "Free Market" to vote with their dollars on what they think of the current NBN plans, design and execution. It depoliticises the debate, frees up Government debt and would ease some of the worst Policy concerns the Coalition has over funding

As Kohlers' Bonds are specifically targeted at soaking up foreign investments, the interest rates don't have to be Australian Reference Rate + Risk Margin, but US Rate + Margin: say 4% (0.5% + 3.5%).

Alan Kohler wrote:
For Australia the problem is compounded by the very large flow of safe haven capital inflow now arriving, which is largely blind to interest rates. Money is pouring into Australian dollars, including from other central banks, seeking the security of our AAA rating. That’s making the exchange rate immune from domestic monetary policy.

What to do?

The answer, surely, is to give up and put the money to good use replenishing the national infrastructure.

Rather than wringing our hands about the capital inflow, why not give global investors something to invest in other than Aussie government bonds and export LNG projects?

Specifically – infrastructure bonds to finance a huge national building programme of roads, ports, bridges, airports using money borrowed at super low rates to take advantage of this once-in-a-lifetime opportunity.

It would assist the non-mining economy of the eastern states, cushion the transition from the peaking of the mining investment boom and set Australia up for the future.
What other large infrastructure projects could we invest in that would benefit our common-wealth? Many and more than I could guess. But say:

  • The Very Fast Train up the East Coast
    • Additionally, the direct Melbourne - Brisbane inland rail link.
  • Pacific Highway and Hume Highway: full duplication.
  • Upgrades to existing Ports and new Ports.
  • A second and third Sydney Airport: a passenger and separate freight hub.
    • This slots in with the State Government Transport review underway.
  • Waste water recycling in Sydney, Melbourne and Brisbane, as happens in the old Olympic Village: all these cities have long-term water security issues. The last 10-year drought isn't far behind us and with Climate Change, we should prepare for 'challenges'.
  • Improving mass-transit systems in all major cities, including Canberra. Perhaps "light rail" would be good for the National Capital.
  • Local manufacturing capacity for Wind Turbines and Solar Cells to lower per-unit costs and increase deployment.
  • Agriculture and transport improvement in the Top End.
    • Roads are impassable during the Wet Season. Why aren't Hovercraft, as used in the English Channel for years, an option?
  • Create new high-value manufacturing precincts. Why couldn't Australia become one of the major players in Industrial Robotics? We have the talent and capability, while demand is exploding.
The Infrastructure Bond model could be applied to many useful projects: just as the USA built its Freeway system after WWII to fuel economic growth for 4 decades, Australia could use this cash-inflow opportunity to seed the next half-century of development.

I'm not sure how the interest on the Bonds gets paid... The NBN, Very Fast Train, Ports and Light Rail are all commercial enterprises with good cash-flow: they're easy. But highways aren't and there would be stiff consumer resistance to tollways on the major highways where the only gain is 'safety', an intangible.

The data showing the structural change in the Australian Dollar exchange rate was published by Alan Kohler on his website. Look for [no permalink]:
"Dollar Has Divorced Resources Stocks" [heading]

The index of resources companies in Australia has fallen steeply since mid-2011, yet the dollar has stayed high against the greenback.

Source: Iress
The chart is at: http://1.static.australianindependentbusinessmedia.com.au/sites/default/files/styles/ak_graph/public/kohlersgraphs/2012/Nov/121126-dollar-resources.png


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